Did you know, VAT or the famous Value Added Tax was originally called as Sales Tax? This is an indirect applicable whenever there is goods and services sold by the company. This Tax is paid by the customer via producer to the state government. Business owner earning an annual turnover of more than Rs.5 lacs by supplying goods and services are liable for VAT registration.
VAT is levied both on local as well as imported goods. Similar goods and services are taxed equally and VAT is applicable at different stages of production. VAT made the game much fairer because now you will be taxed based on the type of goods and service rather than uniform rates. With VAT Registration, you will be saving on revenue which with previous sales tax regulations you possibly wouldn't have.
Hey, but why should consumer pay for VAT?
VAT is a tax on consumption which is borne by consumers. It is applicable on 554 goods. VAT protects consumer from the cascading effect of the turnover tax which is tax on each sale with no credit for the tax paid at earlier stages.
Will I be taxed on capital input that I invest in my firm?
Look basically you have three tax variants:
1. Consumption variant-(not the capital that you invest is taxed, but the use of capital goods which produce consumer goods is taxed);
2. Income variant (depreciation on the goods is excluded);
3. Gross Product Variant (no exclusion, only goods that are used up currently are subtracted from the firm's sale) And hence VAT payable = VAT on output (total value of sales) - VAT on input (purchases any paid by firm to produce)
Does the VAT in India differ from one state to another?
- 0% VAT Rate:
For essential commodities like some of the goods like salt, Sugar etc.,
- 1% VAT Rate:
For items, which tend to be highly expensive, like Gold, silver precious jewellery fall under this category of goods. Most Indian states have fixed VAT for these items at 1% of the amount.
- 4-5% VAT Rate:
Most of the FMCG goods come under this category of VAT, like oil, coffee, medicines etc. is around 4-5% for most states in India.
- General VAT Rate:
General VAT rates apply to goods which cannot be segregated and put under any of the above listed VAT categories. For goods like liquor, cigarettes etc. many governments charge high VAT rates of 12.5% or 14-15%.
When to file VAT Returns?
VAT Returns are filed every month or every quarter depending on the amount of VAT you pay. The normal rule is that if you pay less than Rs 15,000 for VAT every month, a VAT Return is to be filed every quarter. If your Input Tax is greater than your Output Tax you can carry over the difference as a credit to your next VAT Return. In certain circumstances, the VAT Commissioner may pay you any excess if he is satisfied that excess is a regular feature of your business.
What kind of proof do I have to show to the commissioner?
Haven't you seen situations where, a small notice at billing counter at pizza hut stating that take food for free if no bill given?
Yep! That's the best example, the seller should always have a copy of the bills to claim. For starting entrepreneurs, a Simplified Tax Invoice would be good enough that must include the following information:
- Your name, address and TIN
- Serial number of the invoice
- Date of the invoice
- Brief description of the goods and services supplied.
- Total amount charged to the customer including VAT and
- A clear statement that the price includes VAT.
To Read about the Process of VAT registration click here
To know the documents required for VAT registration click here
Startup entails complex procedures and many bureaucratic hurdles, entrepreneurs are better off using professional services. Hiring a virtual lawyer and virtual accountant can save time and help ensure that the process goes smoothly.